One of the big challenges facing the Chinese economy over the last 10 years has been the rapid rise in salaries.

At present the economy in China is bad, worse than I have ever seen in two decades living in Asia. But maybe a silver lining can be found in the coming reduction in wage inflation. This will contribute to the long-term viability of the Chinese economy, and may set the stage for continued high levels of Foreign Direct Investment (FDI) in production and services. It may give your company another way out of the mess.

The backdrop for the rapid rise in salary is well illustrated by a recent report by Standard Charted bank, authored by Stephen Green, their Head of Research in China.

The report covers many aspects of the Chinese economy but the part that is of interest here is the page on salary inflation in China. According to Stanchart, the official urban wage in 2006 was about RMB1600 per
month but they think this figure is over-estimated because it fails to include a huge chunk of the urban workforce.

The figure they offer is about RMB1200 a month, which equates to a salary (wages) of just under RMB7 per hour or US$ 1 per hour.

Of particular interest is the figure give for official wage inflation , which has been about 18%  year on year. Stanchart also think this is overestimated. It seems to hit the nail on the head for me if you look at China’s professionals, but what do I know?. Obviously workers cannot be equated to professionals.

Stanchart estimate that labor costs in manufacturing have risen 10-15%  over the last few years in nominal terms. If you look at the graph above you can see that the growth figure itself is a rising figure, and as I said, most people would expect it to fall this year. Note what this implies though. The rise in salary will be reduced. It’s not that the salaries themselves will go down.

If we get to the situation where salaries are actually falling in China, many of us will no longer have a job, or a business.

The report notes that wage rises have largely been slower than productivity improvements so they suggest there is scope for salary increases, assuming all other things being equal. They seem quite sanguine about the whole issue of salaries, which is reassuring, and say that labor costs are usually only 10-15% of total costs. This means that their impact is not as high as we might expect.

But if this is the case then why the exit of so many companies from China in 2008, immediately before and after the introduction of the new China Labor Law? Wouldn’t that exit tend to imply that wage rises have been higher than productivity over the last few years?

This would be my suspicion, but it could just as easily be that the wage rises in other countries, like Vietnam and Bangladesh, have also been slower than productivity increases. It’s just that these rises were even less than in China.